KEY POINTS
- FLUFFING LOCAL? As a reminder, YELP is serving Google AdSense ads adjacent to its search results (Google pays YELP to display ads on its site). We're not sure if the economics will be material, but it's something we can't just ignore given YELP's ~75M desktop UVs (4Q15). Since YELP shuttered its Brand Advertising segment, those revenue will likely be reported in its Local Advertising segment. Even if AdSense is immaterial to total revenues, it could be the difference b/w a beat/miss on 1Q results and/or 2Q guidance for no other reason than the sell-side isn't looking for it. That said, there could be near-term, but temporary risk to staying short the 1Q release. The key is to focus on YELP's ARPA, which will essentially tell us if AdSense is material.
- 2016 ≈ 2015: We've kept the short on since it appears mgmt has repeated its mistake from 2015 by guiding to street expectations for 2016. We suspect the inline guide was a panic move in response to LNKD's earnings release, which drove YELP down almost 20% in the following +12 hrs of trading before YELP's mid-day earnings release. Post 4Q15 results, YELP now needs accelerating new account growth on historically low attrition rates to hit consensus Local Ad revenue estimates. That also implies accelerating salesforce productivity since its guided revenue growth is exceeding its 2016 saleforce growth target (20%-30%). In short, this is pretty much the same setup as this time last year; we're expecting another 2H blow-up on 3Q guidance (2Q print), if not 2Q guidance depending on how its other segments perform in 1Q.
- BUT IT'S SO CHEAP: It is, but we heard the same thing at various points along its slide from a forward 15x P/S multiple. Granted, YELP might be in an asymmetric setup to the upside, but this is likely only a risk to the upcoming release; after that we're just getting closer to what we expect to be another full-year guidance cut. The other implication is that YELP will be acquired. We don't believe YELP's price is expanding the market of potential suitors simply because there are only a handful of companies that would be willing (large enough) to absorb YELP's model into its financials without taking a material hit. As a reminder, the only way to fix that model is to improve ROI (i.e. lower price), which would result in down y/y revenues given YELP's attrition issues.
Let us know if you have questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
